Friday, February 15, 2008

What If There Is No Growth To Share?

He's already looking older... and he hasn't even seen the books yet

This morning Tyler toddled along to hear George Osborne deliver his speech on tax reform (see here).

It had been billed as his response to the growing pressure from "The Right" for more definition on his tax policies. In particular, having unfortunately accepted Labour's tax and spend plan for the next three years, we on The Right want him to talk seriously about how he will deliver lower taxes thereafter.

First, his two minute praising: much of what he said, even if we'd heard it before, was sensible. He will cut the Corporation Tax rate, funded by the wholesale pruning of allowances, and he will also introduce a new NAO style office to probe and expose unnecessary complexity in taxation (both as recommended by the the Forsyth Tax Commission Report- see previous blogs eg here and here). He also repeated his intention to increase green taxes with all additional revenue returned via family tax cuts. We're less convinced by that (see here) but as he said, it can be seen as a Meade-style expenditure tax (good).

So praising done.

Now, about those tax cuts. Sharing the proceeds of growth is a great slogan. Masterful. But to us guys on the right it has all the hallmarks of a trust-me-I'm-a-politician pledge. Nobody's saying George is dishonest, but those Events do have a habit of undercutting the best of intentions.

F'rinstance- what if there's no growth to share?

According to George, repeating Philip Hammond's CH article last week (blogged here) we can look forward to trend growth of 2.75% pa. Which means Labour's plan for 2% pa real spending growth is affordable, and fully consistent with tax cuts. As George put it, Labour has finally adopted his policy of sharing the proceeds.

But how does he know growth will be 2.75% pa? True that's been the Treasury's long-term "assumption", but even they now only factor in a "cautious" 2.5% pa in their fiscal projections, and their assumption for the next three years is actually even lower at 2.4% pa (see Pre-Budget Report).

What's more, you can only be truly confident about trend growth after the event, not before. In the first five years of the Thatcher government growth averaged just 0.8% pa: did they believe they could rely on an underlying 2.75% pa to bail them out? Especially since during the whole of the Wilson/Callaghan 70s administration it had only averaged 1.5% pa.

Or what about poor John Major? His first two years were a pit of economic despair with no growth whatsoever. Even after those long-delayed green shoots finally appeared, the whole of his first five years only clocked up 1.6% pa growth.

The point is that talk of 2.75% pa is a latter day luxury. Yes, we've achieved it over the last decade, but that's been on the back of some rather special one-off factors - a public spending splurge, a booming housing market, and errors by post-Enron US legislators that allowed the City to become the centre of global finance. All fueled by that massive wobbling credit balloon.

The fact is, all of those factors are currently going into reverse, and after 13 years of Labour tax and spend, there won't be much good news awaiting George at No 11. As we've noted before, growth is already plunging.

Now George might say, as Hammond did last week, that spending cuts at a time of "cyclical" weakness "would risk destabilising the economy at a moment of vulnerability". But if such cuts are used to fund tax cuts, that needn't be the case.

And if we don't get those tax cuts, we can forget all about 2.75% "trend" growth. We can't just assume it as some God-given right. With Labour having emptied the cupboard and maxxed the credit cards, we're going to have to earn our way back to growth. And all the evidence is that tax cuts are just about the only reliable tool we have.

PS In case you missed it before, here's the picture book version of the Forsyth Report:

BOM the book now available

Drawing on six years of blogging government waste, this book shows how we spend far more than we need on our public services. It sets out the facts and explores the underlying issues. Just why does government spend so much and deliver such second rate service? Why do we put up with it? And what are the alternatives?

ABOUT BOM

Despite all the talk of cuts, government still consumes nearly half our national income. Yet many tens of billions of its spending is wasted, with taxpayers made to pick up the tab for a depressing array of overpriced sub-standard services. This is money we can no longer afford, and our National Debt is already at danger level.

If we're to avoid further decades of stagnation and austerity we urgently need to find another way. Exposing and understanding the wastefulness of government is a necessary step in the right direction.